Yahoo Finance Lululemon Athletica inc. (LULU) Stock Is in the ‘Cobra Position’
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It’s no secret that the retail trade has been difficult thanks to the Amazon.com, Inc. (NASDAQ:AMZN) effect. Lululemon Athletica inc. (NASDAQ:LULU) undeservedly gets swept in that negative wave from time to time. LULU has particular circumstances that should shield it from the carnage.
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Today, LULU is certainly a living up to the word’s meaning: Its stock is a pearl!
The term athleisure exists thanks in large part to Lululemon. We see people wearing their clothes out doing everyday things. Usage is no longer a niche market, nor is it a fad. It’s how some people like to dress and they are diehard fans.
Not too long ago I knew someone who stood in line for two hours just to get into a sale event. Then they waited an additional 90 minutes in line to pay. So needless to say, LULU clientele is loyal fanatics. Perception is that it’s a quality product and that’s all that counts.
This is not the same as saying that LULU is AMZN proof. But they are not in danger of a margin squeeze like say Macy’s Inc (NYSE:M) or more recently the supermarket industry. LULU has a premium product offering and it’s only a matter of finding the best outlet for it.
I think of it like a Nike Inc (NYSE:NKE) not so much like a brick-and-mortar department store. It has a proprietary brand. So it’s going to hold up better than typical retail for as long as the quality perception remains.
Coming into earnings the options markets were expecting a move north of $6 or 10%. But this is nothing strange for this momentum stock. LULU has a habit of gaping large on earnings. Reactions usually make the stock either a shooting star or tumbling machete. Today it’s rallying, but it’s still not too late to go long.
Fundamentally, LULU is not cheap, but its price-earnings ratio is in line with the competition with decent margins. They are improving their throughput online, which is the proper trend for retail. So management is headed in the right direction.
So the relative value is there in LULU in this macro environment. And for that reason, I am willing to risk owning especially that my trade would leave me a big room for error.
I am sure that there are experts that would argue that the exuberance in the stock is now overdone and that’s why I use options. There I can build a buffer zone just in case they are correct.
The threat of disappointment from LULU is low. Analyst expectations are distributed across the gamete. So they are not all of the same opinions. This reduces the odds of a meme trading wave going against my trade anytime soon.
Technically and coming into this earnings report, the LULU stock was vulnerable. It was teetering just below the neckline of a bearish HS pattern. $54 per share looked imminent but the bulls were saved by the earnings.
LULU Stock Options
The Trade: Sell LULU stock Dec $47.50 naked put and collect $1 to open. This is a bullish trade where I have an 85% theoretical chance that price stays above my risk. Otherwise, I own the share and would accrue losses below $46.50.
I can mitigate the down risk by selling a spread instead.
The Alternate Trade: Sell LULU Dec $47.50/$45 put where I have about the same odds of winning. If so, the spread yield would be 18% on risk. Compare this with buying the shares at face value then, without any room for error, expecting a rally to profit.
With either of my set ups, all I need is for LULU to not fall below $47.50 per share through 2017.
Investing in the stock markets is fraught with danger so I never risk more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow @racernic on Twitter and Stocktwits.
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